FT.com / Columnists / John Authers - Short View: Money illusion
Short View: Money illusion
By John Authers, Investment editor
Published: March 3 2010 19:36 | Last updated: March 3 2010 19:36
One of the strongest forces behind the rebound in stock markets may be money illusion. People tend to think about investments in nominal terms (without taking into account inflation), and in terms of their own home currency.
On such an illusory basis, UK investors have now completed their recovery from the crisis that began in 2007. The FTSE All-World equity index, on a total return basis (including the reinvestment of dividends), and in sterling terms, is now, unbelievably, at an all-time high.
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Any UK investor who put most of their money to work outside the country has been insulated from the worst pain, therefore. The severity of the slide in sterling, combined with the recovery in markets, has now been enough to recover all their losses since 2007.
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Devaluation, at least in the short run, makes all sorts of choices much easier – which explains why other countries want to do the same thing. The problem is that foreign exchange is a zero-sum game; add the gains some have made to the losses someone else has suffered, and they sum to zero.
Dollar-based investors still have a long way to go before they earn back their losses. In dollar terms, world equities are still 25 per cent down from their high.
And for Japanese investors, who were long able to blunt the effects of the market slump at home by investing overseas and enjoying the effects of a currency that was artificially cheap, things could not be much worse. World stock markets, in yen terms, are still 44 per cent down from their summit in early 2007.
As Japan has the oldest population of the leading economies, with a large cohort soon to retire, that is not reassuring. But this analysis does at least show that a big devaluation can do a lot to ease what would otherwise be very significant economic pain.
Life in Britain would be very different now, if the pound had not devalued from the dizzy heights it hit two years ago.
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wow, angleski vlagatelj, ki vlaga doma (in ne hodi v tujino) je ze v plusu od zacetka krize!
ok, pa inflacijo more odmislit, ampak te ni blo veliko...
